Malaysia Airlines could opt for bankruptcy if multiple, costly lawsuits are filed in response to missing flight

There is recent speculation Malaysia Airlines could end up in bankruptcy as a result of likely lawsuits from the families of passengers who were on the still-missing Flight 370.

But Charles Tabb, a national expert in U.S. bankruptcy law who is now a resident scholar at the American Bankruptcy Institute, suggested in a recent interview that there are many distinct factors that could make any potential bankruptcy proceeding in this situation unusual and complex.

“We have no earthly idea what happened,” Tabb said about the jet’s disappearance. One other factor that makes this case distinct is that it could involve many nations if bankruptcy were sought. “There’s not any easy way to do this,” Tabb said.

Since the plane went missing, news reports from China suggested Malaysia Airlines could face bankruptcy. Among the news organizations claiming Malaysia Airlines’ liabilities in connection with the flight could lead to bankruptcy is CCTV. In fact, the TV news operation alleged, “There was serious talk before flight MH370 disappeared that the airlines might enter bankruptcy because the Malaysian government doesn't want to support the losses.”

Losses at Malaysia Airlines have been mounting. The company’s net loss in 2011 was $681 million, $131 million in 2012, and $354 million in 2013, CCTV reported.

The airlines’ liabilities for the missing flight could exceed $40 million, CCTV said. Another report, from Want China Times, cited one estimate that the payout for claims “will be a big as those related to the 9/11 terror attacks in the United States.”

Under the Montreal Convention, Malaysia Airlines would pay at least $175,000 to each passenger’s family. Another report, from Stuff in New Zealand, said claims against the airlines could reach $250 million, according to estimates from Australian aviation attorney Joseph Wheeler.

University of Illinois law school professor Charles Tabb – a fellow of the American College of Bankruptcy, who earlier practiced bankruptcy and commercial law in Dallas and was involved in the Braniff Airways and Continental Airlines Chapter 11 reorganizations – confirms it is possible that Malaysia Airlines could seek bankruptcy protection in the United States. “If Malaysia Airlines has any property at all in the United States, they are eligible to file Chapter 11 in the United States,” Tabb explained.

In practical terms, there may be a question in the U.S. Bankruptcy Court whether such a proceeding would be allowed to continue. “I don’t know if a court in the United States would let it go forward,” Tabb said. “Malaysian courts also may not let it go forward.”

If it takes place, it would not be the first foreign airline that sought bankruptcy protection in the United States. Colombia’s Avianca Airlines successfully reorganized in 2004.

Also, because Malaysia Airlines lists its headquarters at the airport in Subang, Selangor, Malaysia, court proceedings could take place in Malaysia. Then, if the company wanted to send out notices of bankruptcy proceedings to relatives of passengers, the relatives may be expected to appear in court in Malaysia – a clear difficulty for already grieving families. Most of the families live in China.

In addition, Tabb said that any bankruptcy proceedings likely would have to consider both Malaysian law and the corporate structure of the company. For instance, there is a related government-owned holding company called “Penerbangan Malaysia Berhad (PMB),” according to Hoovers.

“PMB was formed in 2002 as part of the restructuring of Malaysian Airline System (MAS) and its Malaysian Airlines unit. The restructuring gave PMB ownership of the carrier's fleet, which it leases back to MAS. PMB assumed MAS's long-term debt and took responsibility for the airline's money-losing domestic operations, but in 2006 the government reassigned most domestic routes to AirAsia and MAS reassumed its remaining domestic business. PMB owns a 52 percent stake in MAS and buys, sells, and leases aircraft and aircraft engines through subsidiary Aircraft Business Malaysia,” Hoovers said.

Depending on how the holding company was set up, there may an issue of sovereign immunity, Tabb said. It is based in Kuala Lumpur, Malaysia.

Plaintiffs, when reviewing whom to sue, may also try to sue Chicago-based Boeing Corp, the manufacturer of the jet, or Rolls-Royce, the British maker of the engine. That case would likely relate to allegations of defects in the plane or engine, respectively. But investigators have yet to conclude how the plane disappeared. One theory is that a pilot or someone else may have flown the plane into the Indian Ocean on purpose. That likely would not be the fault of Boeing or Rolls Royce.

In addition, there could be lawsuits filed against the insurance company for the airlines, or suits filed against the airlines, which would then collect money from the insurance company. Or there could be an insurance fund set up for victims’ families. Much of the dispersal of money would depend how policies were written and which country’s laws would be governing. It is unlikely that an insurance company – unless it was small – would face bankruptcy if it were successfully sued in connection with the case.

Given that Tabb formerly worked on bankruptcy proceedings, he said an attorney advising Malaysia Airlines may suggest the company start planning now. It needs to get its legal house in order and work out political and public relations issues. It needs, too, to identify assets and identify in which jurisdictions they are located. The company needs to know how its insurance policy is set up and be prepared to send out any notifications, as well. Given that no one knows what happened to the plane, it would be hard for the company to move forward with any settlements, Tabb said.

One important issue for the airlines to consider is that they may have assets in nations other than Malaysia. They may want to consider moving those assets back to Malaysia, such as money in bank accounts. The courts and government in their home country may be more supportive than officials in other nations, when it comes to these assets.

“The Malaysian government would take care of its national airline,” Tabb said.

At some point, Malaysia could even decide to put Malaysia Airlines out of business, and replace it with a new entity, or, operate both the new and old businesses.

Meanwhile, attorneys are now trying to recruit clients among the passengers’ families, Inside Counsel reported. Chicago’s Ribbeck Law sent six of its employees to Beijing, China, and six to Kuala Lumpur, Malaysia, according to The New York Times. That same law firm claims it eventually will represent half of the passengers’ families in the Malaysian Airlines flight, news reports said. Other law firms are contacting passengers’ families, too, The Times reported.